Originally posted on the Huffington Post, June 13, 2017
I won’t keep you in suspense. The two most dangerous words for investors are “legendary investor.” This description is bandied about by the media to describe an assortment of stock market “gurus”, billionaires and wannabes who’ve made a fortune by managing other people’s money.
The premise is alluring: They’re rich so they know something the rest of us should heed.
The reality is quite different.
Mr. Rogers’ Neighborhood
It’s difficult to argue with the success of Jim Rogers. He’s an American businessman and investor. He made a fortune as co-founder of the Quantum Group of Funds, which he started with famed investor George Soros. He’s a frequent guest on financial media where he dispenses predictions about the stock market with great confidence. Sometimes he’s right. Sometimes he’s wrong. Sometimes he’s terribly wrong.
Recently, Roger’s made news in a particularly fawning interview with Business Insider CEO Henry Blodget. The article introduced Rogers as — you guessed it—”legendary investor Jim Rogers.” He lived up to his billing by predicting a market crash “in the next few years, one that he says will rival anything he has seen in his lifetime.”
When pressed for more details, Rogers was quite specific. The crash will occur “later this year or next.”
If that isn’t enough to raise your stress level, Rogers noted that he moved to Asia because of the potential for turmoil. His description of what is in store for western civilization is chilling: “You’re going to see parties disappear. You’re going to see institutions that have been around for a long time — Lehman Brothers had been around over 150 years. Gone. Not even a memory for most people. You’re going to see a lot more of that next around, whether it’s museums or hospitals or universities or financial firms.”
Other “legendary investors”
Bill Miller is often called a legendary investor. His Legg Mason Value Trust fund outperformed the S&P 500 every year from 1991 to 2005. His reputation took a hit in 2008 when his fund got clobbered by bad bets on the financial industries. Investors lost “all the value he’s ever created for the fund’s shareholders through the years.”
There may be no better known legendary investor than John A. Paulson. He made nearly $15 billion a decade ago when he placed a massive (and prescient) bet on the collapse of the housing market. Money flooded into his hedge fund, reaching $36 billion in 2011.
According to The New York Times, his firm recorded “nearly double-digit losses in several of its large funds as of the end of March.” Current assets under management have fallen to $10 billion.
David Einhorn, like Paulson, achieved legendary status by betting against the housing market. Since then, he’s had his ups and downs (like many investors). According to Forbes, he has “bounced back from his worst year since the financial crisis” with an 8.4% gain in his hedge fund, Greenlight Capital.
Wall Street is littered with terrible predictions from otherwise credible sources. Robert Zuccaro was part of a mutual fund team that achieved impressive returns in 1998 and 1999. That track record apparently gave him confidence to predict the Dow would reach 30,000 by 2008. So much for market timing!
In a similar vein, Kevin A. Hassett, one of Mitt Romney’s economic advisors, co-authored a book published in November, 2000 in which he predicted the Dow would reach 36,000. He may turn out to be correct, but he was way off in his timing (by several decades) .
At the other end of the spectrum, in 2011, perennial bear Harry Dent predicted the Dow would fall below 10,000 in the near term before crashing to 3000 in 2013. The Dow had its best year in over a decade in 2013. It closed at 21,271 on June 9, 2017.
“Legendary” doesn’t mean “accurate.”
Rogers’ dire prediction may turn out to be 100% correct. No one knows. That’s the problem. Because the direction of the market is random, and often influenced by tomorrow’s news, it’s unpredictable. Accurate predictions are likely a function of luck and not skill.
Instead of relying on the musings of “legendary investors” or others, focus on factors you can control: Your asset allocation, diversification, keeping costs and fees low and deferring or avoiding taxes.
Just because an investor is “legendary” in their own mind, or is characterized as such by the media, doesn’t mean their predictive powers are any better than yours.